Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Household debt wikipedia , lookup
United States housing bubble wikipedia , lookup
Continuous-repayment mortgage wikipedia , lookup
Foreclosure wikipedia , lookup
Adjustable-rate mortgage wikipedia , lookup
Security interest wikipedia , lookup
Mortgage broker wikipedia , lookup
Reverse mortgage wikipedia , lookup
Mortgage loan wikipedia , lookup
Mortgages Lecture 1 Jan Cookson Track/Slide 1 This is the first of three lectures on mortgages. Track/Slide 2 Securities Let us imagine that I borrow some money from a bank. What happens if I fail to repay the loan in accordance with the terms we had agreed? By what means does the bank get its money back? The answer to this question depends on whether the bank had given me an unsecured loan or a secured loan. The function of a security is to provide some guarantee for repayment of a debt. If the loan was unsecured, the bank would have had the right to sue me for non-payment. However the danger for it would be that I had become insolvent by the time it got a court order for the repayment. In that case it will probably lose all or some of its money since it would not be able to claim any of my assets in priority to other creditors. To avoid this risk in the case of large loans the bank is likely to require me to offer security for repayment of the loan. Here if the security is of adequate value, the bank is protected because it has a claim to the security in priority to other creditors' claims. So as I've said, the function of a security is to provide some guarantee for the repayment of a debt. Securities can relate to people. For example, a bank might require the parent of a young student taking out a loan to enter into a contract of indemnity. That contract is a form of security. If the student doesn't pay, the parent can be sued. Or security can relate to property. An example in relation to personal property is when a person pawns a belonging, for example where someone deposits jewelry with a pawnbroker in return for a loan. Here the security is possession of the jewelry. If the loan is not repaid, it can be retained by the pawnbroker. Our focus of course will be security which relates to land and the most important form of security in relation to land is the mortgage. Track/Slide 3 Mortgages are very widespread. Even back in 1970 Lord Diplock in Pettitt v Pettitt referred to Britain as "a property, particularly a real-property-mortgaged-to-a-building-society-owning, democracy". And statistics from the Communities and Local Government website taken recently show that 14.6 million households in England own their own home and out of those 11.1 million have mortgages. Track/Slide 4 The pre-1926 development of the Law I don't usually discuss the history of a topic but I think it can help you better understand the present day law if we briefly outline its earlier development. Creation of a mortgage before the Law of Property Act 1925 came into being Before the LPA 1925 if a freehold owner of land wished to mortgage it as security for a loan, then he had to convey his whole estate to the lender. He would literally transfer the freehold. This was subject to a covenant, a promise, by the lender to re-convey the property back to him if he the borrower repaid the loan on a fixed date. Similarly in the case of leasehold. What happened if the borrower failed to repay on that fixed date? Well at law common law took a very hard line. Notwithstanding that the procedure didn't reflect the true nature of the transaction, if the borrower didn't repay on the fixed date, he lost any right to have the land returned to him even if he was just a single day late. The lender became the outright owner even if the land was worth much more than the loan. And the borrower still remained liable for the debt. So what was the position in equity? During the 17th Century equity intervened because of the unfairness of the arrangement at law. It compelled the lender, even though the date for repayment had passed, to accept late payment of it and to re-convey the property to the borrower. So in the 17th Century the borrower gains this new right, an equitable right to ignore the fixed date for payment and still recover his property on later repayment. However, there had to be some limit on this equitable right. Therefore equity developed a degree of foreclosure. This was a court order which declared that the borrower's equitable right to pay off the loan and recover the land was extinguished. Track/Slide 5 Terminology A mortgage is an interest in property granted by a mortgagor to a mortgagee with a provision for redemption. Its function as we now know is to provide security for repayment of a loan. The mortgagor is the person who grants the mortgage, that is the borrower. The mortgagee, the person who receives the mortgage, that is the lender. I said that a mortgage was an interest in property granted by a mortgagor to a mortgagee with a provision for redemption. So what is redemption? Well it is the process of freeing the property from the mortgage by repayment of the debt. So the process of freeing the property from the mortgage by repaying the loan. Track/Slide 6 Popular abuse of terminology An oddity about mortgages is that the terms used by non-lawyers give a wholly inaccurate description of the nature of a mortgage. In lay, i.e. non-legal terms, aspiring property owners get a mortgage from a bank or building society which is in the business of offering mortgages and the lender may then allow the borrower to keep the mortgage if they move house. What's wrong with that terminology? Well we'll come to answer that question by looking next at the creation of a mortgage. Track/Slide 7 The creation of a legal mortgage. Track/Slide 8 Under the Law of Property Act 1925 there are 2 ways of creating a legal mortgage. The first is a long lease with provision for cesser on redemption. By this first method a mortgage is created by a borrower granting a lease of his land to the lender. The statutory provisions are section 85(1) of the 25 Act which makes provision for the borrower to grant a lease where his land is freehold and section 86(1) for the borrower to grant a sub-lease where his land is itself leasehold. The Act provides that the lease will include a clause that it will end when the loan is repaid. That is a provision for cesser on redemption. The Act does not specify what the period of the lease must be but it is usually very long. If a freehold is being mortgaged, the lease period is commonly 3,000 years. So just comparing this to the position before 1926, by this method the lender does still get an estate in the borrower's land which, as we will see, gives him certain rights but the borrower now retains his legal estate albeit subject to a long lease. In fact it is now very rare to create a mortgage this way. The second method that we are about to look at is far more common. Track/Slide 9 The second method is by granting what is known as a charge by deed of way of legal mortgage, much more commonly known as a legal charge under section 87 of the 1925 Act. In a mortgage created by this means, the borrower executes a deed in which he states that he is charging his land with payment of the debt by way of legal mortgage. I've given you an example extracted from an actual mortgage deed of this. It then has the effect of giving the lender a mortgage over the borrower's land. However, unlike the first method of creating a mortgage, this charge gives the lender no estate in land. It is in fact a unique type of interest. Nonetheless, by virtue of section 87 of the 25 Act, its effect is exactly the same as if the lender had been given an estate. And this is because section 87 says a charge gives the lender "the same protection, powers and remedies" as if the mortgage had been created under s.85(1) or 86(1) the 25 act. As I said, this is far and away the most common way of creating a mortgage and do please note it is the only way of creating a legal mortgage in the case of registered land. This is the impact of section 23 (1)(a) of the 2002 Land Registration Act. Track/Slide 10 As ever, formalities need to be complied with for a legal right to actually achieve legal status. Thus a deed is needed for the creation of the mortgage. Additionally if the borrower's land is registered then the mortgage must also be registered and if the land is unregistered and the mortgage is the first mortgage then it must be registered and inevitably the borrower's estate will have to be registered at the same time. Track/Slide 11 Slide 12 [11] simply gives you an example of how a charge by way of legal mortgage will show up on the charges register of a registered title. Track/Slide 12 How then is an equitable mortgage created? Track/Slide 13 Well there are three main ways in which this can happen. The first is exactly the same as a method of creating an equitable lease. So where there is a contract for the grant of a mortgage which complies with section 2 of the 1989 Act and is specifically enforceable. This might be because there is an actual contract to grant the mortgage although that's slightly unusual these days or more likely where there's a written mortgage that either it wasn't made by deed or the deed was defective. A second method which can again apply to some equitable leases is where the mortgage was correctly made by deed but then it was not registered as needed at the Land Registry. And the third situation when equitable mortgage will arise is where somebody only has an equitable interest to begin with, as for example a beneficiary under a trust. They may borrow money on the strength of their equitable interest. If the lender acquires a mortgage in return, they will necessarily only obtain an equitable mortgage. Track/Slide 14 A mortgagor's rights and protections Track/Slide 15 So once a borrower has granted a mortgage over their property what rights and protections do they have? Well firstly they have that right to redeem. As I have said, the right to redeem is the right to pay off the debt and to take the property back free from the mortgage and the lender's rights. Although the 1925 Act altered how a mortgage could be made, it did not alter the borrower's right to redeem. That right both at law and equity remained unchanged. So just to recap, as regards the legal right to redeem first. When a mortgage is made, the parties agree a date on which the loan will be paid off and the property freed from the mortgage. That is a contractually agreed date and at law time is treated as being of the essence of the contract, the consequence of this being that failure to redeem on that agreed date meant the borrower lost the right ever to do so. Notwithstanding that position at law, equity, as we saw earlier, decided the right to redeem should remain available even after the agreed date had passed. So given it can be ignored, is the legal date totally irrelevant? Well it is almost entirely academic. Quoting from the land lawyer Elizabeth Cook, as she says, a home owner taking out a 25 year loan would be startled to be told that strictly speaking he must pay all the money back in 6 months time and that his having 25 years in which to pay is merely a concession. This is a fiction because if all is going well, neither party wants the loan paid off in 6 months time. However, although the date is almost entirely academic, it does have one important function and that is that some of the lender's remedies only become available once that date has passed. So for example, a lender's only able to make an application to the Court for a degree of foreclosure after the borrower has failed to repay the loan on the legally agreed date. And it is for this reason that it is usual for mortgages to set an incredibly early date for repayment, usually within 3 – 6 months of the mortgage being granted. Neither party intends the mortgage should be repaid then but if things go wrong under the mortgage agreement then the lender doesn't have to wait to exercise its remedies. The other right that I want to mention or protection is the curiously named "No clogs on the Equity of Redemption". That isn't referring to a pair of shoes. It is referring to the fact that there should be no impediment on the ability of the borrower to pay off the loan and redeem the mortgage. Equity will not tolerate any arrangement which tries to prevent or postpone that happening. This is the meaning of this slightly curious phrase. Track/Slide 16 We don't have time to look in detail at the provisions of the mortgage but I just wanted to mention a couple of the standard terms and conditions. So these include fairly evidently provisions for repayment of the loan, when it is to be repaid, what the interest rate is to be etc. It also, which often comes as a surprise to new borrowers, contains covenants, promises by the borrower relating to the property itself, for example to keep it properly maintained, to keep it fully insured, not to let the property out without the permission of the borrower. And it will contain detailed provisions relating to the rights and remedies of the lender. Track/Slide 17 I want to go on now and look at one of the most important rights that a lender/mortgagee has – a mortgagee's right to possession of the mortgaged property. Track/Slide 18 This right is one of the most important ones that the lender has that is relevant to the remedies it can use when the borrower defaults. And notice it is a right to possession. It is not a remedy. Why? Well because this is because a lender has or is treated as having a legal estate in the land. And remember it is a lease or a legal charge which is treated as being a lease and like any lease this will carry with it a right to possess the land. And it is an immediate right to possess the land. It arises as soon as the mortgage is made and is in no sense dependent on the borrower defaulting on the payment. In one case it was said "I suspect that many mortgagors would be astonished to discover that a bank which had lent them money to buy a property for them to live in could take possession of it the next day". And there is a very famous statement about this in the case of Four Maids Ltd v Dudley Marshall Properties as per the slide. "The mortgagee may go into possession before the ink is dry on the mortgage." Notice however the quote also says "…unless there is something in the contract, express or by implication, whereby he has contracted himself out of that right". In residential properties it is in fact usual for the lender to give the borrower the right to remain in possession until there is default on the mortgage repayments. As one commentator says, "This at least prevents bank managers from wandering in during Eastenders". So what is it that inhibits the lender from taking possession? Well there are two main reasons. In the case of residential properties, large institutional lenders have no interest in physically occupying the property. They want the borrower to occupy and keep paying the mortgage. In the case of commercial properties there may be a better reason for taking possession if the borrower is behind on his loan repayments because then income from the property could be used to pay the loan interest instead. However, following the intervention of equity, a mortgagee in possession must account strictly to the borrower so any additional income from the property over what the lender needed would have to be paid over to the borrower and equally any shortfall in the income the lender could have got but failed to from the property would have to be made up. So to give you an example of all this at work, in the case of White v City of London Brewery Co., an 1889 case, the lender was a beer brewer and the mortgaged property was a free house pub. When the borrower defaulted, the lender took possession and rented it out but as a tied pub which meant selling the lender's beer. In fact it would have been more profitable to let it out as a free house being able to sell whatever beer it liked. As a consequence, the lender was then held liable to account to the borrower for the difference in the rent that could have been obtained. I said that the lender normally would only take possession once the borrower had defaulted on the mortgage. Why would they do so even then? This is because the lender would generally want to sell the property to get back what they are owed. Most buyers won't want to buy it with the borrower still living there. So by obtaining possession, the borrower would have to leave and the lender can then sell with vacant possession. Track/Slide 19 So is a Court Order needed for the mortgagee lender to repossess? In the case of residential premises, a lender will almost always go through the Court and this is because of section 1(2) of the 1977 Protection from Eviction Act which makes it a criminal offence for a mortgagee of residential property to unlawfully deprive a residential occupier of his occupation unless the mortgagee proved that he with reasonable cause believed that the occupier had ceased to live there. However, I do say it will almost always get a Court order because it is possible for the mortgagee to repossess without one where the property is vacant. This occurred in the 1999 Barclays Bank case that we will in fact be returning to. When a property is repossessed without a Court Order just note that is referred to peaceable re-entry. As regards commercial property, section 1(2) of the Protection from Eviction Act does not apply. However, there is also section 6 of the 1977 Criminal Law Act. This applies in fact not only to commercial but again to residential property too and that provides that it is a criminal offence to use or threaten violence for the purpose of securing entry into premises where there is someone present on those premises at the time who was opposed to the entry. So although it is more possible for a lender to peaceably re-enter commercial property without a Court Order even if it is being occupied, there is this danger of a criminal offence being committed if there is the use or threat of violence in order to obtain entry. A Court Order is always preferable and the very great majority of lenders do go to Court before obtaining possession. Track/Slide 20 If a mortgagee is seeking possession of the property, is it possible for the borrower/mortgagor to prevent or postpone that happening? We need to consider two provisions. The first is a statutory one contained in section 36 of the Administration of Justice Act 1970. That will be our real focus. And then we will look briefly at the Court's common law, its inherent jurisdiction, to postpone possession. Track/Slide 21 The provisions of section 36 of the Administration of Justice Act 1970 Track/Slide 22 A very important opportunity is offered to the borrower by section 36 of the 1970 Administration of Justice Act. This gives the Court a discretion to delay possession by the lender. Its objective is to allow the borrower a breathing space to get his financial affairs in order but notice there are certain pre-conditions to it applying. First and critically it only applies to residential premises, i.e. not commercial ones, and secondly it is only available where the lender has applied to Court for the possession. Therefore in the Barclays Bank case where, as we saw, the lender peaceably repossessed without a Court Order, section 36 was not available to the borrower. Finally note that if it does apply, it will apply to most kinds of mortgages. The only form it doesn't apply to is where a charge, a mortgage, has been granted as security for an overdraft. Track/Slide 23 Let us have a look at the wording of section 36. Subsection 1 provides that where the mortgagee under a mortgage of land which consists of or includes a dwelling-house brings an action in which he claims possession of the mortgaged property … the court may exercise any of the powers conferred on it by subsection (2) below if it appears to the court that in the event of exercising its power the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage…". And then under subsection 2 the Court has power to adjourn possession proceedings or stay or suspend execution of a possession order or postpone the date of delivery of possession. Track/Slide 24 Thus in order to delay possession by the mortgagee, the borrower has to meet these criteria. They must be likely to pay any sums due under the mortgage within a reasonable period. Track/Slide 25 Now ascertaining the meaning of those criteria depends on ascertaining why the borrower is seeking to postpone possession. There could be one of two reasons, either to pay off the arrears or alternatively to sell the property themselves. So in the first case the intention of the borrower is to sort out the instalments that they owe and then to stay in the property and continue paying the mortgage as usual. In the second case the borrower realises that their income will not be sufficient to clear any arrears but that the capital that they would get from selling the property would clear the whole mortgage debt. So basically the borrower's recognizing they are not going to be able to stay in the property because they lack sufficient income or savings that they want to sell the property themselves rather than having it sold by the lender. We're now going to look at the criteria applicable to each of those situations. Track/Slide 26 So what is the meaning of to pay any sums due when the intention of the borrower in postponing possession is to allow them to clear the arrears and stay in the property? Well in fact its meaning caused problems after the Act first came out. It had indeed been intended to refer only to the borrower clearing any pre-existing arrears. For example, someone might have missed two monthly payments and those missing payments were meant to be what had to be paid to enable the Court to suspend possession. However, you need to know that in nearly all mortgages there will be a condition which says that the entire debt shall become due if a person misses paying one instalment, so if you miss one payment of interest, then this will trigger liability to repay the whole loan. So in the case of Halifax Building Society v Clarke in 1973 the borrower was in arrears on his instalments and had tried under section 36 to postpone an application the lender had made for a possession order. However, his mortgage did include the provision that I have just talked about and accordingly the Court held that any sums due meant that he had to repay the whole capital debt and not just the arrears. On this basis there was no chance that the mortgagor could pay within a reasonable period so no postponement order was made. This led to an amendment being introduced by section 8 of the Administration of Justice 1973, the effect of which is any sums due now means the sums which the mortgagor would have been expected to pay if there had been no provision for earlier payment of capital in the event of a breach. So sums due in summary does now mean simply the outstanding arrears of the instalment payments plus the Courts have made clear the borrower must also be able to keep up with the current instalment payments. Track/Slide 27 Still considering the meaning of the criteria from the perspective of a borrower who is simply trying to clear the arrears, what does within a reasonable period cover? Well for many years a reasonable period was regarded by Courts as about 2 – 4 years. However in 1996 this guideline was reassessed in the very important case of Cheltenham and Gloucester Building Society v Norgan. That case defined a reasonable period as capable of being the whole of the remaining length of the mortgage term. So imagine the situation where a mortgage was to be paid over 25 years and after 5 years the lender brought an application for possession because of say £10,000 arrears. The effect of Norgan is the borrower may be given the remaining 20 years to pay back the £10,000 and, as we've already see, the borrower must also be able to keep up future payments of the debt as they fall due over that period. The Court listed a number of considerations to be taken into account in deciding how long to actually allow because remember that I've said that Norgan defined a reasonable period as capable of being the whole remaining length of the mortgage term, not that it would be. Those considerations included 1) The ability of the borrower to make payments now and in the future 2) The likely duration of any temporary financial difficulty 3) The reason for the arrears 4) The period remaining of the original mortgage 5) The adequacy of the security to support the loan and arrears One relevant factor under 5) is likely to be the size of the equity. If the equity is small then to make the lender wait for a considerable period may be unjust because in a falling market the property may end up being worth less than the outstanding loan in arrears. Norgan is very important. In the example I gave you of a 25 year loan where £10,000 of arrears had accumulated when the case comes to Court after 5 years, paying that £10,000 over the original period allowed of 2 - 4 years is likely to be hopeless but paying it over the 20 year period is very much more feasible. Track/Slide 28 And finally where the borrower is seeking to clear the arrears and remain in the property, what is the meaning of likely? Well as the slide says, this has been held by the Courts to mean that there must be a realistic chance, a realistic prospect of clearing the arrears and at the same time maintaining the current payments. This is a question of fact for the Court but the Norgan case made clear that the borrower must present firm evidence of a realistic financial plan which would enable the arrears to be paid so some form of detailed budget. And I'd like us to look briefly at a couple of cases. You will note that they date from the early 1990s which was the last time in which the country went into recession. Firstly the case of First National Bank v Syed. Track/Slide 29 Mr Syed was for many years employed as an accountant but more than 5 years before the case went to Court he had been made redundant. His evidence to the Court said he had been seeking to establish a business from his home. This slide is an extract which gives a feel of how the Court viewed his position per Lord Justice Dillon. "I need say no more …than that the prospects [of Mr.Syed obtaining work] are entirely speculative, and there is no basis for estimating reliably when and whether any, and if so what, income will be received…. I have to say, with every regret for the defendants' misfortunes, that if the test to be applied [is that in s.36 AJA 1970], I am wholly unable to see any prospect of the defendants paying off the arrears within any reasonable period, while also paying current instalments." Thus the Court refused to postpone possession and note that it also said in that case that it could not act because of sympathy for the unemployed in a recession or even though repossession constituted a serious social problem. Track/Slide 30 The next case that I want us to consider is that of Town And Country Building Society v Julien in 1991. In this case Mr Julien was a self-employed design consultant. He had bought a property in July 1989 and had borrowed £630,000 in order to do so. However he made only 2 monthly repayments and then stopped. The lender issued proceedings in April 1990 for possession. Between July 1990 and August 1991 Mr Julien filed 4 affidavits, each referring to his hopeful prospects for work. The extract on this slide is typical. "Since about January 1990, problems in the commercial property market have much reduced my income. However, I believe it is likely that within the next six months. I will obtain substantial new contracts which will restore my gross income to its former levels and enable me to maintain my mortgage payments and the discharge my arrears.” Track/Slide 31 Mr Julien's application under section 36 to defer possession failed. The case went to the Court of Appeal. This is an extract from the judgement in the County Court which Mr Julien was appealing. Unfortunately for him, the Court of Appeal endorsed it. "What are the prospects of Mr. Julien actually earning sufficient sums of money by his own efforts or through any other commercial way to pay off this very substantial debt? What he said in evidence was he was quite sure the recession was ending, that he had, and I am paraphrasing it slightly, a number of professional irons in the fire which he may be able to take out and very profitably. It all seems to me, however you look at it, highly speculative and at the moment quite frankly he is asking the Building Society to act, or his insurers to act, as his bankers for the next year while he re-establishes his professional practice which has suffered so much because of the effect of the recession. Well I do not consider that being within the words of Section 36 , I do not consider that, however one turns it round to be, to say, that means that Mr. Julien is likely to be able, within a reasonable period, to remedy the default which has occurred." The final case referred to is Cheltenham and Gloucester Building Society v Grant 1994. This is a case which bucked the trend in allowing an application under section 36 to succeed even though the evidence was pretty slight. Mr Grant had been divorced and had had the matrimonial home transferred to him as part of the divorce settlement. He gave up work to look after his 6 year old son and so arrears built up on his mortgage. He was in receipt of income support and interest payments on the mortgage were made by the DSS but were £147 short each month. Mr Grant told the Court that he believed himself to be highly regarded in the concrete repair industry and would have no difficulty finding employment in the future once his son was at secondary school. And here the judge took a very liberal view, it is thought motivated by judicial compassion for a difficult situation and made an order for possession, which however wasn't to be enforced without leave of the Court and was subject to review at the end of the year. The lender appealed on the basis that this was an unreasonable exercise of the Court's discretion under section 36. When the case went to the Court of Appeal, the Court made clear that it disliked the decision but felt that as the judge's exercise of the discretion could not be regarded as plainly wrong, it couldn't interfere with the decision. However, the way in which the Court of Appeal manifested its dislike indicates that it is unlikely to be followed as a case. Track/Slide 32 I want to know consider the section 36 criteria in a case where the borrower recognizes that they are not going to be able to remain in the property but want to sell it themselves